Working Paper: CEPR ID: DP8237
Authors: Eran Yashiv
Abstract: This paper explores the dynamic behavior of investment and hiring within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using structural estimation in aggregate, private sector U.S. data, it shows that the model, which features adjustment costs, is able to fit the data. Unlike many previous results, the fit is achieved without implying high adjustment costs. The interaction of hiring and investment costs is significant and is negatively signed, implying complementarity between investment and hiring. There is a substantial role for labor market conditions in hiring costs, whereby the latter are lower in ?good times.? The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is countercylical. This is so as they follow the cyclical behavior of their present values. An asset-pricing type empirical analysis indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.
Keywords: business cycles; complementarity; forward-looking behavior; gross hiring; gross investment; labor market conditions; present values of hiring and investment
JEL Codes: E22; E24; E32; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hiring costs (J32) | Labor market conditions (J29) |
| Investment costs (G31) | Capital adjustment (E22) |
| Future profitability expectations (G17) | Hiring decisions (M51) |
| Future returns expectations (G17) | Investment decisions (G11) |
| Hiring costs + Investment costs (G31) | Hiring and Investment decisions (G31) |
| Marginal value of investment (E22) | Investment and Hiring increase (E22) |
| Hiring increases (J23) | Total and marginal costs of investment decline (G31) |
| Gross investment (E22) | Gross hiring (J23) |
| Gross hiring (J23) | Gross investment (E22) |
| Future labor profitability (J39) | Hiring rates (J63) |
| Future returns (G17) | Investment rates (G31) |